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Are Folling Financial Forecasts Right for Nonprofits?

February 5, 2024
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The financial position of a nonprofit can be a victim — or a benefactor — of rapidly changing economic conditions. Traditionally, nonprofits have relied on annual budgets to understand their financial position in the midst of such changes. The problem is that annual nonprofit budgets don’t account for rapid fluctuations in sources of revenue, like donations and grants, nor for sudden market opportunities. Too often, nonprofits must scramble to adjust or miss chances to grow.

Rolling financial forecasts should be in the toolkit of every nonprofit finance team. This model is designed to address the kinds of changes that nonprofits need to adapt to and counteract. Rolling forecasts increase confidence in and understanding of the budget, create opportunities to be proactive, increase accuracy, and improve flexibility.

Better understanding of the budget, with added insights

Past performance is a great place to start with a budget, but it won’t provide all of the answers. Unfortunately, annual budgets are typically built solely on knowledge gained from what has come before. Because of the added insights gained from rolling financial forecasts, nonprofits always have an updated view of their current financial situation. This allows leaders and board members to make decisions based on what is happening in the present, rather than over-relying on historical information.

Be proactive with improved cash flow

It’s difficult for a nonprofit to plan its programs without a clear understanding of its cash flow. Annual budgets provide almost no visibility into where an organization is on a month-to-month basis, forcing nonprofits into a defensive stance for projects and spending. A rolling financial forecast is updated regularly — sometimes even monthly — and provides real-time numbers on cash flow for decision-making.

Data visibility increases accuracy and improves confidence

Nonprofits are familiar with this scenario: Your budget has been approved. You enter the first month of the year, and donations are down, or a grant falls through.

Instead of adjusting, that gap in funding just gets moved to the next month, or the next quarter. Annual budgets are out of date almost as soon as they’re approved.

Rolling financial forecasts are updated frequently, increasing the accuracy of the budget. It’s easier to see where you stand more quickly, and adjustments can be made on the fly to absorb the ups and downs. Rolling forecasts mean that leaders need to spend time on budgets every month, rather than once a year, but that regular time investment is smaller and leads to bigger gains.

Flexible forecasting for nonprofits leads to better identification of opportunities and risks

The world of a nonprofit is unpredictable. Environmental events, political turns, and even the news cycle can change their financial position, for better or for worse, at the drop of a hat.

Even worse, annual budgets provide little flexibility to leverage a new opportunity or address a risk until the next budget cycle. This might not be a detriment when an event happens in November, but it makes a world of difference if that same event happens in February.

Flexibility is an integral feature of rolling financial forecasts. Budgetary adjustments can be made quickly to avoid the impact of risks, or to expand operations to encompass new opportunities as they present themselves.

Part of this flexibility comes from being able to run what-if scenarios based on timely and accurate data, creating a clear picture of today’s financial position.

Nonprofits can adapt and change with today’s events only if they have a current and up-to-date understanding of their budgets, and flexibility in their financial forecasting. Rolling forecasts can help nonprofits proactively address changes and react more quickly to the needs of the community.

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